Bloomberg is reporting that through last week, the municipal market is having its best year since 2014. The combination of declining U.S. Treasury yields and a positive technical backdrop has driven returns between 3% and 7% year-to-date, depending on maturity. Importantly, munis are behaving as expected in what is proving to be a volatile market environment.
Yields:
Municipal yields typically follow the direction of U.S. Treasury yields, with this year being no exception. U.S. Treasury yields have fallen between 75 and 100 basis points across the yield curve with municipals largely following suit.
Technicals:
One reason why munis are keeping up with the sharp rally in Treasuries is a highly supportive technical backdrop, where new issuance has been muted and demand is strong. On the issuance side, the elimination of refunding transactions that was included in the 2018 tax bill has dramatically reduced supply. In addition, flows into the municipal space have been robust. As measured by weekly mutual fund inflows, the market has experienced inflows 31 straight weeks of inflows.
Fundamentals:
In a world where concerns are mounting over the global economy, the U.S. centric municipal market is performing well fundamentally. The unemployment rate is low, consumer spending is steady and property values remain elevated. These factors mean the various forms of tax receipts, which constitutes revenue for municipalities, are healthy. And while certain municipalities continue to face challenges from off balance sheet liabilities such as pension obligations, we are broadly seeing strength.
Portfolio Impacts:
We have responded to this performance in our crossover Blend Strategy by capturing strong municipal performance and moving into taxable bonds, including certain corporates. Particularly for short maturity bonds, investors can capture 2-3x the yields in investment grade corporate bonds versus investment grade municipals.As we push through the remainder of 2019, we expect municipals will continue perform well as many of the trends outlined above are expected to remain in place.Source: Bloomberg
